Dollar Curbs Tumble Despite GDP Drop, Fed Stimulus Oath

The fundamental winds were blowing heavily this past session, but you would have been able to tell from the dollar or capital markets. Despite the speculative and stimulus implications of the day’s top US 4Q GDP report and Fed rate decision, neither risk trends nor dollar were significantly moved. Notably, the Dow Jones FXCM Dollar Index (USDollar) checked its sharp drop Tuesday from six months highs by closing slightly higher in the following session. From the majors, when the remarkable performances by the Swiss franc and Euro (more on that below) were excluded, the dollar managed to hold its ground well.

Market direction was not the surprising aspect of the previous trading session. Instead, the lack of volatility comes off as extraordinary. The US docket offered up two key events that could tap into two of the market’s most recurrent drivers: risk trends and competitive stimulus. First up was the advanced (first) reading of fourth quarter US Gross Domestic Product (GDP). The consensus was set for a significantly slowing from the previous quarter from a 3.1 to 1.1 percent annualized pace. The actual figure was a contraction (-) 0.1 percent. The bullish angle to the data was that the significant decline was established through the biggest drop in defense spending in 40 years and a slowdown in inventory buildup (each deducting 1.3 percentage points). Nevertheless, fast-moving speculators will often move on surface level interpretations and then the committed money comes in with a more thorough assessment. Ultimately, we are almost always met with volatility.

The second opportunity to move the greenback and broader capital markets came in afternoon trading of the New York session. The Federal Open Market Committee (FOMC) deliberated on policy the month after the group announced it would add outright purchases of Treasuries to its QE3 mortgage backed diet. That translates into $85 billion in monthly stimulus that would be sustained until unemployment was expected to hit 6.5 percent and/or inflation returned to 2.5 percent. It was unlikely that the group would follow up with another change so soon, but there was speculation that timing for a slowing or halt to stimulus would be offered drawn out of the comments or vote count. A new board member (George) did dissent, but the reflection on growth ‘pausing in recent months’ spoke more to sustained stimulus. And yet, no dollar unwind.

There are explanations that can be made as to the lack of drive to each of the past sessions’ fundamental drivers, but the lack of volatility stands out as highly unusual given the connections to the risk and stimulus themes. This could very well be an indication that market participation is frozen. Though, as an early warning, the biggest drop in high-yield bond funds in seven months and pick up in volatility measures is interesting.

Euro Climbs Above 1.3500 Despite Deepening Spanish Recession
Perhaps the only currency that was more unusual in its fundamental bearings than the dollar over the past session was the euro. EUR/USD rallied above the heavy 1.3500-figure (the midpoint of the 2011 high and 2012 low) despite an explicitly weak docket. Top listing was the 4Q Spanish GDP release which posted a deeper quarterly contraction (0.7 percent) which led the economy to its fastest pace of wealth evaporation since the end of 2009. Less dramatic, but contributing to the negative view: the Italian stock index plunged 3.4 percent, Catalonia asked for €9 billion in additional funds and Greece’s bank refunding group said it would need more time. Despite all of this, the euro advanced against all but the franc. Repatriated capital flows and ECB stimulus reductions (LTRO) may play a role here; but such a balance won’t last if risk trends spark.

New Zealand Dollar Recovers Lost Ground after RBNZ HoldsThough there wasn’t a material risk aversion move showing through in US equities or the Risk-Reward Index, the New Zealand dollar was falling back through much of the last session. Temporary reprieve arose when the Reserve Bank of New Zealand (RBNZ) announced its competitive 2.50 percent benchmark would be kept in place and offered no suggestion that a dovish shift was coming despite a cooling in recent inflation reads. An intraday rebound was in order, but it would fully erase the day’s losses. This disparity from supposed risk trends remains a concern.

Japanese Yen: Escalating Threats Running Out of Influence
Risk trends can be ignored when they are not under significant pressure, but then we need to find another proactive catalyst like relative policy easing for sustained momentum. Therein lies the yen crosses’ quandary. The yen is currently at multi-year lows against most of its counterparts, and this move without a significant appetite for risk carry interest in the FX market or a competitive stimulus effort. Sure, the Bank of Japan (BoJ) has threatened 13 trillion yen in monthly stimulus starting in 2014, but that is a year away. The only way to keep the risk at hand while the Fed actually eases is to escalate the threats. New BoJ Governor ambitions can stoke easing speculation, but not much at these highs.

Swiss Franc Surges: Safe Haven, Euro Strength, SNB Unwind?
Hands down, the biggest mover on the day was the Swiss franc. The currency rallied against all of its counterparts with the biggest gains coming versus investment currencies (Australian and New Zealand dollars) and the manipulated yen. This is a move that has purpose and drive, yet there were no major news events or yield changes. A euro-sympathy move falls short, so perhaps it was SNB balance sheet unwind.

Canadian Dollar Faces Monthly GDP Read in Upcoming Session
There was little individual drive from the Canadian dollar this past session, but that may change in the upcoming session. On deck, we have the November GDP release. Though more timely, the monthly figures tend to lessen the data’s impact. That said, if the data offers a substantial surprise (particularly a miss), the ‘loonie’ may build on fellow commodity currency momentum and lead an underlying fundamental shift.